United States: Supreme Court Expands Discretion To Award Enhanced Damages For Patent Infringement And Eliminates The Federal Circuit's ‘Seagate Test'

Last Updated: August 24 2016
Article by Michael J. Sacksteder and Scott Tolchinsky

In Halo Electronics, Inc. v. Pulse Electronics, Inc., the U.S. Supreme Court changed the law regarding when enhanced damages should be awarded in patent infringement cases by eliminating the two-part test for determining whether a district court may increase (or decline to increase) damages pursuant to 35 U.S.C. § 284, as required by the 2007 en banc Federal Circuit Court of Appeals decision, In re Seagate Technology​. By abandoning the Seagate Test, the Court has broadened the standard to an inquiry centering on whether the circumstances of a particular case represent an "egregious" example of misconduct that goes "beyond typical infringement." The new standard emphasizes the subjective state of mind of the accused willful infringer at the time of infringement, removing an objective threshold that had made the issue more amenable to summary judgment during litigation.

History of Enhanced Damages

Enacted as part of the 1952 codification of the Patent Act, § 284 provides that, in a case of patent infringement, courts "may increase the damages up to three times the amount found or assessed." In Aro Man​ufacturing Co. v. Convertible Top Replacement Co.​, the Supreme Court described § 284 as providing that "punitive or 'increased' damages" could be recovered "in a case of willful or bad-faith infringement."

Shortly after the creation of the Federal Circuit, the court fashioned a standard for willful infringement: "[w]here ... a potential infringer has actual notice of another's patent rights, he has an affirmative duty to exercise due care to determine whether or not he is infringing." Underwater Devices Inc. v. Morrison-Knudsen Co. Over time, this duty of due care standard focused on the egregiousness of the defendant's conduct based on all the facts and circumstances, such as in Read Corp. v. Portec, Inc.

In applying this "totality of circumstances" test, certain factors were developed to help guide courts: (1) whether the infringer deliberately copied the ideas or design of another; (2) whether the infringer, when he knew of the other's patent protection, investigated the scope of the patent and formed a good-faith belief that it was invalid or that it was not infringed; (3) the infringer's behavior as a party to the litigation; (4) defendant's size and financial condition; (5) closeness of the case; (6) duration of defendant's misconduct; (7) remedial action by the defendant; (8) defendant's motivation for harm; and (9) whether defendant attempted to conceal its misconduct.

In 2007's Seagate decision, the en banc Federal Circuit rejected the duty of care standard articulated in Underwater Devices, adopting instead a two-part test that focused on "objective recklessness." The first step of the Seagate Test was entirely objective the patent owner was required to "show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent." The Federal Circuit later held that this first step was a question of law for the court. See Bard Peripheral Vascular, Inc. v. W.L. Gore & Associates, Inc. Second, if the first part of the test was satisfied, the patentee was required to demonstrate, also by clear and convincing evidence, that the objectively high likelihood of infringement "was either known or so obvious that it should have been known to the accused infringer." The Seagate Test generally made it more difficult for patentees to prevail on a claim of willful infringement. Accused infringers could often avoid facing a willfulness claim before trial by pointing the judge to reasonable defenses regarding noninfringement or invalidity. Even if those defenses were ultimately unsuccessful, courts often found them to negate any "objectively high likelihood... [of] infringement of a valid patent."

New Standard for Enhanced Damages Announced in Halo v. Pulse

In June of this year, the Supreme Court rejected the Seagate Test in Halo Electronics, Inc. v. Pulse Electronics, Inc., describing it as an "unduly rigid" test that "encumbers the statutory grant of discretion to district courts." The Court noted that the "principal problem" was that the test "requires a finding of objective recklessness in every case" and that such a threshold excludes from punishment many of the "most culpable offenders," who may have acted without regard to whether reasonable defenses could later be raised.

In a broadening of the standard for enhanced damages, the Court explained that "the pertinent language of § 284 contains no explicit limit or condition on when enhanced damages are appropriate" and noted that "although there is 'no precise rule or formula' for awarding damages under § 284, a district court's 'discretion should be exercised in light of the considerations' underlying the grant of that discretion." In exercising this discretion, courts are to "take into account the particular circumstances of each case." The ultimate question for courts is whether the facts of a particular case represent an "egregious" example of "misconduct" that goes "beyond typical infringement." Given the vagueness of this new standard, perhaps courts will look for guidance in the factors used in the totality of circumstances test before Seagate. Because of the breadth of the standard and the wide variety of potential factual scenarios, the law concerning which types of behavior are sufficiently egregious to support an award of enhanced damages will likely be slow to develop.

Questions Arising from the Halo Decision

The Court's emphasis on the "particular circumstances" of the case suggests that there are factual issues to resolve before the court exercises its discretion to award enhanced damages. However, the Court did not make clear who would be the arbiter of the facts in determining whether the infringement is sufficiently "egregious" or "willful" to permit the court to exercise its discretion under § 284. That task remained for the Federal Circuit, which in WBIP, LLC v. Kohler Co. recently resolved the issue in favor of sending at least the underlying facts to the jury: "[w]e do not interpret Halo as changing the established law that the factual components of the willfulness question should be resolved by the jury." A purely factual finding of willfulness by the jury, however, somewhat divorces the concept of willfulness from the ultimate determination of statutorily prescribed enhanced damages by the court.

With the question of willfulness treated as a factual inquiry determined at least partly by the jury, accused infringers face the danger of substantial prejudice not just on the issue of willfulness, but also concerning infringement, invalidity, and damages. Willfulness evidence at trial often focuses on characterizing the accused infringer as a "bad actor" in the eyes of the jury, and the resulting mindset may sometimes poison the minds of the jury against the accused infringer regarding unrelated issues. Seagate's objective prong often allowed accused infringers to keep such evidence from the jury entirely. Doing so under Halo appears significantly more difficult, requiring a showing of no willfulness that satisfies the summary judgment standard: that no genuine issues of material facts exist, and that the accused infringer is entitled to judgment on willfulness as a matter of law. See, e.g., TransData, Inc. v. Centerpoint Energy Houston Elec. LLC et al (vacating summary judgment of no willfulness, in light of Halo, since it was based on lack of objective recklessness). In order to avoid such prejudice, some courts may choose to bifurcate willfulness such that it is tried after a jury has reached a verdict on liability. See Peter S. Menell et al., Patent Case Management Judicial Guide, UC Berkeley (July 29, 2015).

Other Impacts on Patent Litigation Moving Forward

One essential consequence of Halo's broader standard is a greater likelihood of enhanced damages being awarded against an accused willful infringer. This possibility may change a defendant's strategy in negotiating settlements. Without the threshold requirement of "objective recklessness," which has allowed courts to grant summary judgment earlier in litigation, defendants may be more reluctant to risk the issue – and the evidence that goes with it – going to the jury. Hence, settlements may be reached earlier and/or increase under a greater threat of enhanced damages.

The new standard also might result in an increased reliance on opinion of counsel letters. Prior to Seagate, under the duty of due care standard, accused willful infringers commonly asserted an advice of counsel defense. See Underwater Devices ("Such an affirmative duty includes, inter alia, the duty to seek and obtain competent legal advice from counsel before the initiation of any possible infringing activity."). Under this defense, the accused willful infringer attempted to establish that its continued activities were reasonable due to reliance on advice of counsel – typically concluding that the patent is invalid, unenforceable, and/or not infringed. In 2004, because of concerns regarding waiver of privilege when disclosing opinion of counsel, the Federal Circuit held in Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmbH v. Dana Corporation that an accused infringer's failure to obtain legal advice does not give rise to an adverse inference with respect to willfulness. Congress later codified this holding in 35 U.S.C. § 298. But now that the Supreme Courthas abrogated the objective standard set in Seagate, courts will be focused more on the subjective state of mind of the accused infringer. Thus, it may often be advisable to obtain an exculpatory opinion of counsel, even though failure to obtain such an opinion cannot be used against the accused infringer.

In sum, the effects of the Halo decision will be borne out as more courts and litigants wrestle with these issues. Given the generalized nature of the new standard and the breadth of potential factual scenarios, it will take time for courts to provide more guidance as to what behavior is sufficiently egregious to give rise to willfulness. Until such time, the less predictable possibility of enhanced damages will loom as a threat during litigation and affect parties' strategies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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